I'm Swinging Around to the Belief that the Reappointment of Ben Bernanke Was Barack Obama's Biggest Unforced Error
David Leonhardt explains why:
Holding Bernanke Accountable: The Fed’s own forecasts suggest that the unemployment rate won’t fall below 5 percent for perhaps another five or six years. Mr. Bernanke believes the Fed “retains considerable power” to reduce unemployment faster, despite the fact that its benchmark interest rate is zero, as he’s said before. Yet he has been hesitant to use that power.... Several other voting members of the Fed’s monetary policy committee — and some prominent members of Congress — oppose aggressive action, because they worry it will set off inflation. But these critics always worry about inflation. They have been wrong again and again... they don’t have enough power to keep Mr. Bernanke from pursuing the policy he thinks is best. So the Fed’s decision to permit high unemployment for an extended period rests on his shoulders.
As he has explained many times, the Fed has alternatives. It could announce that it would keep its benchmark rate at zero for a few years, which would probably hold down long-term rates. It could say that it was comfortable with higher inflation for a limited period of time, given how low inflation has been since 2007 and how high unemployment is. Above all, Mr. Bernanke could make clear that he considers years of widespread unemployment to be unacceptable.
He has not done so, and he has yet to offer a satisfying rationale.
Instead, he has said that more aggressive action brings risks. And it does... every decision involves some risk. Simply stating that more aggressive action brings risks is not a good argument....
One of the best guides to future inflation is recent core inflation — that is, inflation excluding food and energy prices, which bounce around a lot and often do not translate into big changes in other prices. Despite the uptick in core inflation, it has still risen at an annual pace of only 2 percent over the last three months. On only a few other occasions over the last 40 years has it been so low. This shouldn’t be surprising. After all, does the economy feel as if it’s on the verge of overheating? The expected cost of high unemployment, on the other hand, is steep. For one thing, the chances that unemployment will remain a problem are close to 100 percent. The debate is whether the country will return to full employment in four years or 10 years. For another, the consequences of high unemployment are also awful. With fewer jobs, states and cities are short of tax revenue. Families lose their life savings. People’s health can deteriorate. For the long-term unemployed, the financial damage can be permanent. “If things go on and they simply sit at home or work very irregularly,” Mr. Bernanke himself said last year, “when the economy gets back to a more normal state, they’re not going to be able to find good work.”...
Nonetheless, his job performance over the last year or so has been flawed. The Fed badly overestimated the economy’s strength in 2010 and took too long to correct its mistake. Despite his core belief in letting facts guide decisions, Mr. Bernanke has let himself be overly influenced by a group of colleagues who see inflation always and everywhere as a threat and unemployment as a mere nuisance.
